Zero Sum Theory.

Discussion in 'Trading' started by BostonTrader339, Mar 9, 2010.


    In game theory and economic theory, zero-sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero. Zero-sum can be thought of more generally as constant sum where the benefits and losses to all players sum to the same value of money (or utility). Cutting a cake is zero- or constant-sum, because taking a larger piece reduces the amount of cake available for others. In contrast, non-zero-sum describes a situation in which the interacting parties' aggregate gains and losses is either less than or more than zero. Zero-sum games are also called strictly competitive.
  2. Buzzed


    Bob sells 1 share of XXX to Joe at $1.00

    Joe sells 1 share of XXX to Becky at $2.00

    Joe profited $1.00 off the stock market and nobody lost money because of his good fortune.

    114 years later...

    Mike sells 1 share of XXX to Lucy at $220.00

    Lucy sells 1 share of XXX to Mary at $210.00

    Lucy lost $10.00 on the stock market and nobody made money because of her misfortune.

    Is Bob the ultimate loser because he sold his share at $1.00 making a potential loss of 219.00?

    I think not.

    The stock market is not a zero sum game. It's all bullshit.
  3. GG1972


    How stock market really works!!

    Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers seeing that there were many monkeys around, went out to the forest, and started catching them. The “Monkey Man” bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it! The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him. In the absence of the “Monkey Man” man, the assistant told the villagers. “Look at all these monkeys in the big cage that my boss has collected. Here’s a deal! I will sell them to you at $35 and when he returns from the city, you can sell them to him for $50 each.” The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the “Monkey Man” nor his assistant ever again, only monkeys everywhere!

    Welcome to the Stock Market!!!
  4. Trading = Zero Sum
    Investing != Zero Sum
  5. do a search for the phrase "money left on the table"

    the idea is that ALOT of market activity (trades) are not made on the basis of "making a profit".

    imagine a corporation hedging fx exposure.. buying/selling futures based off cash flow projections, not taking a position based on market analysis essentially they are "leaving money on the table" for traders to grab.

    the idea applies to all financial instruments
  6. Can't say that until Becky exits, as well.
  7. The futures markets are zero-sum. Commodity producers want to hedge, they sell. Manufacturers want stable prices, they buy. Speculators do both. Every buy is matched with every sell. That creates the open interest (number of contracts). One person's gain is directly coming from someone's loss (but they may be happy to do so because that's what hedging is all about).

    The stock markets are not quite zero-sum. They are more complicated. Initially some private firms want to raise money. So they sell their company's partial ownership. IPO. Some people bought in. So that IPO money goes to the company's paid-in capital. And those who bought at IPO turn around and sell to others in the open market. However, things get complicated when the company pays dividends to the share holders (increasing the money in the pot - but that money was not brought by the players who come to the table), and when the company slowly takes their treasury stocks to allocate to the employees through stock options (they take away money from the pot but they are not the players who brought in the betting money). Also added to the complication is the secondary offerings, and companies going bankrupt, mergers, etc..
  8. Yes, stock markets are zero-sum provided that one actually sells the stocks that one bought. If a profit is made on a stock then there is a transfer of capital from the buyer to the seller. That buyer then comes in and finances the seller's profit by buying the stock at a higher price. This preserves the zero-sum structure: capital is only transfered and not created, the sum remains constant.

    There are however certain external benefits to owning stocks: dividends are an obvious example, but it's also possible to use stocks as collateral or use them in a takeover of another company. The value contained therein increases the sum.
  9. FredBloggs

    FredBloggs Guest

    life is zero sum my friends. were born with nothing, we leave with nothing (except love)

    please think outside the envelope. what did newton (an englishman) discover regarding energy? its the same with wealth: there is no such thing as wealth creation, only wealth distribution - so how could a financial market, be it stocks or futures be anything else?

    this brings us back to the first statement. we only have what the lord has given us. how we chop it up and divide it amongst ourselves is irrelevant at the end of the day.
    #10     Mar 10, 2010